Current v Proposed Regime of Indirect Taxes in India

Current Indirect Tax Regime in India

Problems in the Present Structure

Present Indirect structure is marked with following problems:

Multiplicity of Taxes

Presently, the Constitution empowers the Central Government to levy excise duty on manufacturing and service tax on the supply of services. Further, it empowers the State Governments to levy sales tax or value added tax (VAT) on the sale of goods. This exclusive division of fiscal powers has led to a multiplicity of indirect taxes in the country. In addition, central sales tax (CST) is levied on inter-State sale of goods by the Central Government, but collected and retained by the exporting States. Further, many States levy an entry tax on the entry of goods in local areas. Taxes by Union Government, State Governments and the local governments have resulted in difficulties and harassment to the tax payer.  He has to contact several authorities and maintain separate records for each of  them.

Complex

The taxes are levied by central government as well as state government. So, a person has to maintain accounts which will comply which will all the applicable laws. This multiplicity of taxes at the State and Central levels has resulted in a complex indirect tax structure in the country that is ridden with hidden costs for the trade and industry.

Cascading effects of taxes

In current indirect tax structure in India, there is cascading of taxes due to ‘tax on tax’. No credit of excise duty and service tax paid at the stage of manufacture is available to the traders while paying the State level sales tax or VAT, and vice-versa. Further, no credit of State taxes paid in one State can be availed in other States. Hence, the prices of goods and services get artificially inflated to the extent of this ‘tax on tax’.

Multiple Compliance

A business person might have to comply with multiple compliance in terms of indirect taxes in India.  Certain major compliance in different states with different set of laws is as under:

ApplicabilityLawReturn filing frequencyDue date of Filing ReturnDue date of Pmt of Tax
For each FactoryExcises DutyMonthly / Quaterly10th of succeeding month10th of succeeding month
For each premisesService TaxHalf Yearly25th of succeeding month after Half year5/6th of succeeding month
KarnatakaVATMonthly20 days20 days
AssamVATMonthly21 days21 days
TamilnaduVATMonthly20 days20 days
U.P.VATMonthly20 days20 days
A.P.VATMonthly20 days15 days
KeralaVATMonthly15 days15 days
GujaratVATMonthly30 days22 days
MaharashtraVATMonthly30 days from half year30 days
DelhiVATMonthly25 days25 days
M.P.VATQuarter30th of month following qtr.upto 10th of following month
RajasthanVATQuarter30th of month following qtr.upto 14th of following month
W.B.VATQuarter30th or 31st of month following qtr.30th or 31st of month following qtr.
TripuraVATQuarter1 month from end of Relevant Qtr.1 month from end of Relevant Qtr.
Himachal PradeshVATQuarter30th of Expiry of each Qtr.10 days before expiry of Return filing

Tax Arbitrage

The problem of tax arbitrage for a single nation poses invisible barrier for free trade.  In many cases, a small difference in rate of tax can result in manifold implications and thus, can induce the business to move into a lower tax territory.  As an example, the different rate of VAT as levied on sale of goods in different states is as under

S. No.StateVAT Rate in Percentage 
    Essential goodsGeneral rate
1Andhra Pradesh     4.00    14.50
2Assam     5.00    13.50
3Bihar     4.00    12.50
4Chandigarh     5.00    12.50
5Gujarat     5.00    15.00
6Haryana     5.25    13.125
7Himachal Pradesh     5.00    13.75
8Karnataka     5.00    13.50
9Kerala     4.04    12.625
10Madhya Pradesh     5.00    13.00
11Maharashtra     5.00    12.50
12New Delhi     5.00    12.50
13Rajasthan     5.00    14.00
14Tamil Nadu     4.00    12.50
15Tripura     4.00    12.50
16Uttar Pradesh     5.00    13.50
17Uttranchal     4.50    13.50
18West Bengal     4.00    13.50

Similarly, Entry tax also acts as barrier for free trade.

GST is seen as a solution to the above problems.

GST shall subsume the following taxes in the times to come once the law is in force:

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The proposed GST regime shall have the following features:

  • It shall be a destination based taxation
  • It shall have a Dual Administration – Centre and state
  • State wise determination of taxable person – no more centralized registration
  • Seamless credit amongst goods and services